TL;DR
Contractors pay income tax in three brackets (31.49% / 37.99% / 46.29%), social security (6.35%), and pension contributions (15.5%). Reports are due monthly by the 15th. FreelancePay calculates and files everything automatically.
1) 2026 Tax Brackets
31,49%
First bracket
Up to 498,122 ISK/month
37,99%
Second bracket
498,123 – 1,398,450 ISK/month
46,29%
Third bracket
Above 1,398,450 ISK/month
Note: These percentages are the combined rate (income tax + municipal tax/útsvar). Income tax is the national portion, útsvar is the municipal portion. Brackets are based on monthly income. Taxes are reconciled annually when you file your tax return.
2) Monthly Withholding Tax (Staðgreiðsla)
How to Report
- 1Log in to skatturinn.is with electronic ID
- 2Select "Staðgreiðsla launagreiðanda" (employer withholding)
- 3Enter your calculated remuneration for the month
- 4System calculates income tax + social security automatically
- 5Confirm and pay — deadline is the 15th of each month
Example: 400,000 ISK month
| Item | Rate | ISK |
|---|---|---|
| Calculated remuneration | 337,377 | |
| Income tax | 31.49% | 106,231 |
| Social security | 6.35% | 21,423 |
| − Personal tax credit | −72,492 | |
| = Paid to Skatturinn | 55,162 |
3) Personal Tax Credit 2026 (Persónuafsláttur)
72.492
ISK/month
(869.904 ISK/year)
- Deducted directly from your calculated tax liability — reduces your tax
- Unused portion (if income is low) can be transferred to a spouse
- No special application needed
- The system applies it automatically when you file monthly withholding
4) Tryggingagjald (Social Security)
6,35%
of calculated remuneration
- Social security contribution — similar to employer social costs in other countries
- Paid together with income tax in the same monthly report
- Deadline: 15th of each month
- As a contractor you are your own employer and pay this rate
5) Annual Tax Return
- Two parts: personal tax return (RSK 3.01) + business report (RSK 4.11)
- Return opens in January, deadline around mid-March
- Reconciles all income, deductions, and adjusts monthly payments
- If you overpaid: you receive a refund
- If you underpaid: you pay the difference
- FreelancePay provides a year-end summary ready for filing
6) Penalties for Late Filing or Payment
Missed monthly tax report
Skatturinn estimates your income and sends a bill + surcharge
Late payment
1%/day for 10 days + late interest (15.25% annually)
Late tax return filing
Late fee and potential additional penalties
Incorrect calculated remuneration
Skatturinn can reassess and charge back taxes
7) FreelancePay Files Everything Automatically
- Income tax + social security calculated and filed automatically by the 15th
- Pension contributions paid automatically on the last business day
- VAT reports filed bi-monthly — always on time
- Year-end summary ready for RSK 4.11 filing
- No penalties due to oversight or mistakes
- You focus on work — we handle the taxes
Frequently Asked Questions
Q: What are the income tax rates for 2026?
A: Three brackets: 31.49% up to 498,122 ISK/month, 37.99% up to 1,398,450 ISK/month, and 46.29% above that.
Q: What is the personal tax credit for 2026?
A: 72,492 ISK per month (869,904 ISK/year). Deducted directly from your tax liability — reduces your actual tax.
Q: What is tryggingagjald?
A: Social security you pay as your own employer. 6.35% of calculated remuneration, paid together with income tax.
Q: What happens if I miss a tax payment?
A: Skatturinn estimates your income + 1%/day penalty for 10 days + late interest. The cost can be very significant.